1. Concepts used in cash flow estimation Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following questions: The present value of can be used to determine the basis of a firm's value. a) accounting income b) cash flows Which of the following best describes incremental cash flows? O They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project. O Incremental cash flows are not relevant because they will occur whether or not the project is accepted. Understanding the nature of projects Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, complete the following: A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? O A replacement project An expansion project What are sunk costs? Sunk costs are in the capital budgeting analysis. a) relevant b) not relevant The role of externalities A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like regular cola is most likely to produce externality. a) an environmental b) a positive within-firm c) a negative within-firm